If the European Central Bank wants to provide more capital relief to Eurozone banks through its securitization-buying scheme than they would get by holding on to their assets, it will have to snap up mezzanine tranches as well, according to Fitch Ratings.
The ECB has said it will buy mezzanine tranches in its Asset-Backed Securities Purchase Programme (ABSPP) provided they are guaranteed.
In a release, Fitch said that the capital impact of ABSPP will not only differ among deal tranches, but also among jurisdictions, collateral and each bank’s approach to calculating credit risk. The ECB launched the program Nov. 21.
Fitch examined the capital relief impact of three hypothetical scenarios: a Dutch bank securitizing residential mortgages vs. holding them; a Spanish bank securitizing small-and-medium enterprise loans vs. holding them: and a Greek bank securitizing residential mortgages vs. holding them.
For the Dutch bank, securitizing the mortgages and selling the senior tranche would give the originator a capital benefit of 1.9% higher than holding it. But Fitch acknowledges that its default and loss assumptions may be more conservative than those used by Dutch banks for the purposes of capital treatment.
The agency said that, for instance, reducing the assumed probability of default by a third cuts the capital charge on the underlying mortgages and the junior and mezzanine RBMS to the point where selling the senior tranche has no capital benefit unless mezzanine tranches are sold as well.
This effect is even more pronounced in Fitch’s hypothetical for Spain.
Employing its own assumptions, Fitch said the Spanish bank would face a capital charge of 16.1% for holding on to SME loans vs. 17.1% for securitizing the collateral and selling only the senior piece.
In this case, there’s a penalty to securitization unless the mezzanine notes are sold as well. And even then, Fitch concludes, the capital treatment in the two choices is about the same.
Finally, the Greek case is the most extreme, as minimum credit enhancement of 25% for securitizations from that country eat into any capital relief earned by selling senior notes in a securitization.
For the ECB to buy a mezzanine tranche it will first need to be guaranteed. Alexander Batchvarov, structured-finance strategist at BofA Merrill Lynch Global Research, said the question remains as to who actually will provide those guarantees.
“There’s little info yet on the ECB ABSPP — it’s been just two working days,” he said.